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Credit Card Rates Come Under Scrutiny In Washington

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This post was written by Stephanie Condon.

Even though some credit card companies have received taxpayer bailouts, many Americans are seeing higher rates for credit cards, a practice that is drawing new scrutiny in Washington, D.C.

Congress and the Obama administration say they want to take steps to aid consumers blindsided by suddenly higher interest rates, new fees or other unexpected changes to their credit card terms.

President Obama, National Economic Council Director Lawrence Summers, and White House officials are meeting today with 14 executives from credit card companies to discuss the impact of the current economic crisis on consumers.

The White House said in a statement after the meeting that the president highlighted a set of principles that he'd like to see in the final legislation, including "protections that ban unfair rate increases and forbid abusive fees and penalties," plain language in statements, "increased accountability," and a requirement that all issuers offer at least one "simple" credit card with straightforward terms and prices.

Meanwhile, legislation is working its way through Congress that would provide credit card customers protection against unfair, deceptive, and anti-competitive practices. The "Credit Cardholders' Bill of Rights Act" made it through the House Financial Services Committee on Wednesday, and it could move to the full House as early as next week. Similar legislation has been introduced in the Senate.

The businessmen at today's White House meeting represented Bank of America, Citi, American Express, JPMorgan Chase, Visa, and other companies. It has a been a rough year for the banking industry, and some have benefited from government bailout money.

While the bailout money was largely intended to keep credit open for consumers, many of these banks are hedging their bets against customers. Some are raising interest rates or limiting customers' credit lines to compensate for the rise in credit defaults. Executives from Capital One Financial, for instance, said on Tuesday their company will invest less money in loans and more in securities after suffering a first quarter loss of $112 million. Defaults on credit card loans rose more quickly than expected, the company said.

Higher rates, limited credit, and other constraints on consumers can become burdensome as more and more people are depending on credit to get by, and may find it increasingly difficult to make payments on time. The credit card delinquency rate, which measures how many customers are 30 days or more late on their credit card bill, hit 5.56 percent in the fourth quarter of 2008. The rate has increased 60 percent since 2005, according to the Federal Reserve, and may continue to rise if more people lose their jobs, leaving them to rely on savings or credit to stay afloat.

The Federal Reserve is preparing to start enforcing stricter rules on credit cards in 2010. But the president and Congress would like to see those rules codified, which is what led to the Credit Cardholders' Bill of Rights Act.

Among other things, the legislation would:

* Prevent card companies from retroactively increasing interest rates on existing card balances, with certain exceptions such as if a card holder is more than 30 days late, if a pre-agreed promotional rate expires, or if the rate adjusts as part of a variable rate.

* Beginning 90 days after the bill is passed, it would require a 45-day advance notice of credit card account rate increases.

* Prohibit issuing credit cards to minors, unless they are emancipated under state law.

* Prohibit double cycle billing, or the imposition of finance charges on debt consumers have already paid on time.

* Require each periodic statement to provide the telephone number, Internet address, and web site at which the payoff balance may be requested.

* Give consumers the right to reject a new credit card before the creditor notifies a consumer reporting agency of its corresponding account.

* Prohibit a creditor from denying a card holder a specified payment grace period if the card holder takes advantage of a promotional rate balance or deferred interest rate balance.

* Require creditors to send a periodic credit card statement to the consumer at least 25 days before the due date for the next payment on an outstanding balance.

The president promoted a credit card bill of rights on the campaign trail, and his administration sees the issue as part of a larger agenda to protect the middle class and to give them the legitimate credit needed to grow.

"People have been deceived into paying extraordinarily high rates that they wouldn't have paid if they knew they were getting themselves into," Summers said Sunday on NBC's Meet the Press.